Scott Wolstein eyes Flats East Bank phase three, other ventures after 5 years at Starwood Retail

Flats East Bank July 2017

Developer Scott Wolstein hopes to break ground in the spring for the third phase of his Flats East Bank project on the Cuyahoga River in downtown Cleveland. The first and second phases, including an office tower, apartments and restaurants, are visible across the water from the west bank of the Flats.
(Gus Chan/The Plain Dealer)

CLEVELAND, Ohio - Sitting on a patio in the Flats on a surprisingly sweaty late-summer afternoon, Scott Wolstein seemed relaxed despite the nearby bustle of valets, trains and boats.

For the first time in five years, he's not commuting from Cleveland to Chicago for work every week. On Sept. 11, Starwood Retail Partnersannounced that Wolstein, 65, was stepping aside as chief executive officer. Though he'll stay involved as a senior advisor to the shopping-mall company's parent investment firm, Wolstein is free to do his own thing.

In Cleveland, that means taking a more hands-on approach at the Flats East Bank, the riverfront project that's largely a legacy investment for Wolstein and his mother, Iris. He hopes to break ground in the spring for a third wave of development, which will include a high-end movie theater, restaurants and an apartment tower.

If that timeline holds, new buildings could open by late 2019, joining the existing Ernst & Young Tower, the Aloft hotel, waterfront apartments, dining and entertainment venues.

Scott Wolstein recently ended a five-year run as chief executive officer of Starwood Retail Partners, a Chicago-based owner of shopping malls. Though he's staying involved with Starwood Capital Group as a senior advisor, he's taking a more hands-on approach at the Flats East Bank and exploring other investment opportunities.Tony Dejak/AP photo

He's looking at ways to fill big, empty spaces - department stores at malls, for example - by teaming up with seasoned operators to install theaters, comedy clubs, billiards, food halls and other activities under a single roof.

And he and Starwood Capital Group are pursuing long-discussed plans to create an open-ended fund - one that allows investors to rotate in and out - focused on shopping centers of all sorts.

"I really hope we do more together," Wolstein said of Barry Sternlicht, chairman and chief executive of Starwood Capital, which owns Starwood Retail. "It's just got to be the right thing for both sides."

In a news release announcing the hand-off to Michael Glimcher, Starwood Retail's new CEO, Sternlicht described Wolstein as "a great partner" and alluded to future joint endeavors. Wolstein led the retail business from its inception in 2012, amassing a portfolio that includes SouthPark Mall, Great Northern Mall and Belden Village Mall in Northeast Ohio. He expects his advisory role to last at least a year.

Wolstein said his ability to focus on the Flats was limited both by corporate constraints and time while he occupied the C-suite, first at DDR Corp. in Beachwood and later at Starwood Retail's headquarters in Chicago. Now, he said, "I'm much more engaged."

Adding more buildings to what's already a $500 million project will require negotiations with private lenders and government officials.

The 23-acre Flats East Bank site, which could support millions of square feet of development at full capacity, is a tax-increment financing district. That means a portion of the new property-tax revenues created by construction can be reallocated to debt payments for infrastructure and other costs. But the city and the developer must work through the details for each phase.

Margaritaville opened this summer at the Flats East Bank and quickly drew crowds.Gus Chan/The Plain Dealer

Wolstein also is talking to the Cleveland International Fund, the senior lender on land earmarked for phase three. That property includes grassy space where new restaurants could rise between FWD Day and Nightclub and Alley Cat Oyster Bar, near the Cuyahoga River, and a parking lot behind the existing apartments. The movie theater would occupy the northern end of the parking lot, with retail and a 15-to-20-story apartment tower to the south.

The Cleveland International Fund, which amasses money from wealthy foreign investors seeking U.S. residency through a federal visa program, provided a $24 million loan for eateries and entertainment venues in the second phase of the Flats project. For the next group of retail buildings, the fund could work with existing investors to redeploy some of that cash or could recruit new investors overseas.

"I think he's got a strong plan for phase three," Steve Strnisha, the fund's chief executive, said of Wolstein. "It's my impression that he's not only making the calls, which he always did, but he's actively driving them. It's very interesting, and we're very interested to work with him."

Wolstein wouldn't identify incoming tenants, who would add to a roster that includes Margaritaville; Punch Bowl Social; Dante's Inferno and Backyard Bocce, which recently opened; Thirsty Dog Brewing Co., set to debut soon; and a Rascal Flatts restaurant and bar, now likely to open by early 2018.

He also won't name the out-of-town partner he expects to pair with on the apartment tower, which could hold 300 residences.

Backyard Bocce is one of the newest additions to the Flats East Bank project, where the vast majority of the retail space is leased.John Petkovic/The Plain Dealer

To free up cash for new construction - and to finish paying for what's already been built - Wolstein started seeking a buyer for the Flats at East Bank apartments on Old River Road this year. The 240-unit building opened in mid-2015 and, as of Friday, was 92 percent leased.

But selling the project outright didn't make sense because of investor uncertainty about how high the taxes on the building might be after 15 years of property-tax breaks end in 2030. The city routinely provides property-tax abatement for new housing and some renovations, if projects meet certain green-building standards.

Now, instead, Wolstein is in "very advanced negotiations" to bring on an institutional investor as an equity partner in the building. The Wolsteins would sell part, but not all, of their stake. The family has roughly $50 million of equity tied up in the Flats, Wolstein said.

"We need to pull out some capital to pay project expenses," he explained. "It's a very expensive project. There have been cost overruns. We still have bills to pay for phase two."

Wolstein said he needs to sit down with city, Cuyahoga County and state officials soon to see what's feasible. For phase three, at least, he's not talking about offices, citing a lack of demand and the gap between construction costs and even the highest rents businesses are paying downtown today. He's still interested in building condominiums, but not right away.

Apartments are easier to finance. And though some lenders are taking a more cautious approach to rental housing, Wolstein doesn't have any concerns about oversupply in the Flats.

"I've always felt that it's a 'Field of Dreams' situation here," he said. "If you build it, they will come. But you have to be able to build it."